Matt Greenfield is the managing director of Rethink Education, a venture fund focused exclusively on early- and growth-stage education technology startups. Tom Segal, an analyst for Rethink Education, has written extensively about innovation and educational technology issues.

Many people are wondering whether there is a bubble in educational technology. Has too much venture capital been invested in the sector? Have valuations gotten too high?
My answer is that there is a bubble in ideas that won't work and a dearth of capital for ideas that can work. Let's start with the ideas that won't work. What type of ed tech have venture capitalists approached with the greatest enthusiasm and the largest piles of cash? The answer is new textbook solutions, including digital textbook platforms like Kno and renters of physical textbooks like Chegg, which just went public. Venture capitalists have put over $500 million into just the top ten companies in this sector.

What is wrong with these textbook businesses? Well, the first problem is that there are simply too many of them. There are four different textbook rental companies backed by venture capitalists, all of which started off doing pretty much the same thing. Then, unsurprisingly, Amazon jumped into this market. Amazon is a ferocious corporate predator that likes to drive other companies out of business by offering prices they cannot match. And, as Brad Stone makes clear in The Everything Store: Jeff Bezos and the Age of Amazon, the logistics of the book business are not as easy to master as one might think.

Selling digital textbooks isn't as easy as it looks, either. Kno started with a blare of trumpets and substantial funding from some of the world's top venture capitalists. They set out to build a tablet computer designed specifically for education, realized that the iPad had an insurmountable lead, and then pivoted to become a digital textbook platform. They partnered with eighty publishers and raised $73 million of equity and $20 million of debt, a total of $93 million of capital. And then, on November 8th, Intel announced that it had acquired Kno. According to Om Malik of GigaOm, the price was $15 million, meaning the venture debt lender got back 75% of its money and the venture capitalists did not get back a nickel. Ouch.

Chegg and Rafter (formerly known as Bookrenter) have pivoted in reasonable ways. Chegg is trying to leverage its relationship with students to become a digital hub for student life, and Rafter is allowing college bookstores to white-label its service. But their original business models are probably not sustainable. Physical textbooks are gradually going away. And while physical textbooks continue to be sold, Amazon is willing to underprice them to secure new customers.

Meanwhile, the digital textbook space continues to get more crowded. I talked to the CEO of an academic bookstore company recently. How many digital textbook platforms would you guess that his stores handle? Five? No, more than that. Ten? Nope, guess again. Twenty? Still too low. The answer is forty-two different digital textbook platforms. Forty-two. Now try to imagine each of those textbook platform companies pitching a book store. Or an author. Or a publisher. Or a venture capitalist. "Choose my platform, choose me! Our platform is totally different!" How many of those platforms does the world really need? How many of those platforms can make money? What do you think the meaningful differences between those forty-two platforms might be? Kno is not going to be the last victim of this frenzy of over-funding. I have argued elsewhere that if you are using the word "textbook" you are probably looking in the rear-view mirror and not thinking clearly about what students need. The word "textbook" drags behind it a collection of obsolete assumptions about how knowledge should be organized and transmitted and learned. The digital textbook platforms are wrappers for a book-like object with a few new social features. Meanwhile, even the century-old publishing incumbents are moving away from book-like things to adaptive courseware: learning objects that simply will not fit into the wrappers being built by companies like Kno.

So there is a bubble in venture funding for education ventures that are obsolete at birth. Meanwhile, there are large opportunities in areas where few venture capitalists will invest. My fund just made its first hardware technology investment. There is a small but hardy group of venture capitalists interested in consumer hardware, but how many venture capitalists would back a company that sells hardware to school districts?

For that matter, how many venture capitalists would invest in ANY company that sells to school districts? Marc Andreessen of $2.6 billion venture firm Andreessen Horowitz has named education as one of his key target areas. But he has also said, "I wouldn't want to back a business that's selling to public schools or characterized by public financing, unions, or government-run institutions. Those institutions are incredibly hostile to change." Marc Andreessen is a brilliant investor and advisor, and I would love to have him co-invest in some of my companies. But he is dead wrong about businesses that sell to school districts. Yes, there are a lot of startups, many with very young founders, that have trouble figuring out how to sell to school districts. Often these entrepreneurs have trouble because they are trying to sell a product that should be a feature of a larger platform, or because they do not understand how school districts function. But there are a number of companies, both in and out of my portfolio, that are scaling rapidly and, in many cases, have reached profitability. I will save the details for a future post, but for now let it suffice to say that companies that sell to school districts often reach profitability much sooner than companies that sell similar products to corporations.

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